Homer Currently Operates a Successful S Corporation

question 44

Multiple Choice

Homer currently operates a successful S corporation. He would like to bring his two teenage children into the business. If he gives each child 10% of the stock, which of the following statements is true?

• A) Since the children did not pay for the stock, Homer will still be taxed on the full income of the corporation under the assignment of income doctrine.
• B) Homer must receive a reasonable salary for any time he spends working on behalf of the business.
• C) Both statements are true.
• D) Neither statement is true.

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Definitions:

Direct Materials

Raw materials that can be directly attributed to the production of finished goods and are an integral part of the finished product.

Period Cost

Expenses incurred during a specific period of time that are not directly tied to the production of goods or services.

Prime Costs

consists of the direct costs directly attributable to the manufacture of goods, specifically direct materials and direct labor.

Conversion Costs

Costs incurred to convert raw materials into finished products, typically including direct labor and manufacturing overhead.